Europe took competition to a new level last week in the global currency-devaluation olympiad. Nominating the politically-minded IMF chief Christine Lagarde rather than a blue-blooded financier to run the ECB is akin to making Trump chairman of the Federal Reserve. No longer can we pretend that the staid protocols of old-school banking still obtain in the financial realm. Instead, there is a strong whiff of desperation as Europe readies a last-ditch attempt to stimulate itself out of a liquidity trap with the ECB’s deposit rate already at minus 0.4%.
No one could possibly believe that bringing rates down even deeper into negative territory will have a lasting impact on the intractable unemployment, anemic economic growth and coming deflation that threaten to snuff prosperity in the eurozone. The alternative is to turn the region into a fiscal-spending free-for-all by lending promiscuously to the likes of Italy, Greece and Spain. Presumably, this would come with Germany’s reluctant assent and the feckless instruction, “Go to town, guys!”
This is unfortunate for Fed Chairman Powell and his nascent plan to propagate yet another QE blowout. He’s practically had his arm twisted off by easy-money advocates and, having donned the knee pads that came with the job, is ready to do their bidding. But now, try as he might, it will be difficult to force the dollar lower. He’ll have to settle for mere asset inflation in the U.S., as though there weren’t enough of that already, and scant hope of shrinking the trade deficit. Not that anyone will much care. Higher share prices will continue to obfuscate a multitude of sins, allowing Wall Street to revel for yet more weeks/months/years until the deepening economic woes of our trading partners, including China, eventually hit home.